ECON NOTES_ Chapter 17-22, Federal Debt and Taxation

Exports

Goods and services that are produced domestically and sold abroad.

Imports

Goods and services that are produced abroad and sold domestically.

Net Exports (Trade Balance)

Value of a nation's exports minus the value of its imports.

Foreign Direct Investment

Requires actively managing an investment, like opening a factory in a foreign country.

Foreign Portfolio Investment

Passive investment, such as buying bonds issued by a foreign government.

Trade Surplus

Positive Net Exports, where exports are greater than imports.

Trade Deficit

Negative Net Exports, where imports are greater than exports.

Balanced Trade

Situation where exports equal imports.

Net Capital Outflow (NCO)

The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners.

Nominal Exchange Rate

Rate at which a country’s currency trades for other currencies.

Appreciation

An increase in the value of a currency, allowing it to buy more foreign goods.

Depreciation

A decrease in the value of a currency, allowing it to buy fewer foreign goods.

Real Exchange Rate

Calculated as E x P/P*, indicating the purchasing power of currency in terms of goods.

Purchasing Power Parity

Theory stating a unit of currency should buy the same quantity of goods in all countries.

The Law of One Price

A good should sell for the same price in all locations.

Arbitrage

Taking advantage of lower prices for the same item in different markets.

Recession

A period of falling real incomes and rising unemployment.

Depression

A severe recession, which is very rare.

Classical Dichotomy

Separation of variables into real (quantities, relative prices) and nominal (measured in money) groups.

Aggregate Demand (AD)

Total demand for goods and services within a particular market.

Short-run Aggregate Supply (SRAS)

Upward sloping supply curve indicating quantity of goods supplied in the short run.

Long-run Aggregate Supply (LRAS)

Vertical supply curve determined by resources and technology.

Wealth Effect

Consumer spending increases as the real value of money rises when price levels decline.

Interest-rate Effect

A decline in price levels leads to lower interest rates, stimulating investment spending.

Exchange-rate Effect

Declining price levels lead to a depreciated U.S. dollar, stimulating net exports.

Sticky Wage Theory

Nominal wages are slow to adjust to changes in the economy.

Fiscal Policy

Government spending and taxation policies set by Congress and the President.

Expansionary Fiscal Policy

Increases aggregate demand by increasing government spending or decreasing taxes.

Contractionary Fiscal Policy

Decreases aggregate demand by decreasing government spending or increasing taxes.

Sacrifice Ratio

Percentage loss in output divided by percentage reduction in inflation.

Multiplier Effect

Effect of a change in spending on the overall economy, calculated as 1/(1-MPC).

Technological Advancement

Continued increases in technology lead to increases in real GDP and decreases in price levels.